Electric vehicle (EV) drivers are increasingly facing financial challenges as rapidly declining vehicle values push many into negative equity, according to a leading dealership chain. Vertu Motors has raised alarms about the pressures car retailers are encountering, highlighting that a significant number of EVs coming off financing arrangements are now worth less than the outstanding loans associated with them.
In typical car finance agreements, this disparity might not heavily impact consumers. As long as they maintain their payments, drivers have the option to return the vehicle and walk away from the debt. In such cases, the lender, which financed the lease, absorbs the financial loss. However, this situation presents challenges for car dealers who often allow clients to transfer any equity—positive or negative—into new financing arrangements in order to foster repeat business.
The drop in the resale value of electric vehicles has been exacerbated by substantial discounts on new cars as manufacturers strive to meet strict government sales targets. Rob Forrester, CEO of Vertu, commented on the depreciation trends, stating that battery electric vehicles are experiencing significant value declines. This depreciation stems from past market conditions in which high prices were prevalent due to supply constraints, paired with an evident decrease in the value of used vehicles since then.
The situation is further compounded by reports indicating that fleet operators—such as leasing companies and rental firms—are incurring significant losses when selling EVs due to “accelerated depreciation.” A recent analysis from the British Vehicle Rental and Leasing Association (BVRLA) revealed that the average “residual value” of vehicles at the end of their leasing period has plummeted from 60% to a staggering 35% over the past two years.
To illustrate this with a stark example, a car that initially cost £50,000 could now be valued at just £17,500 after three years instead of the previously expected £30,000. Most leasing agreements span two to three years, and payments are usually determined based on the anticipated depreciation during that lease term. Most of these agreements are Personal Contract Purchase (PCP) deals, where lenders guarantee a minimum future value for the vehicle at the lease’s completion, often referred to as a balloon payment. Customers can return the vehicle if its market value sinks below this guarantee, but many dealerships provide options to incorporate any negative equity into new financing agreements to retain client loyalty.
As negative equity cases rise, Vertu Motors has issued warnings about potential impacts on dealership profitability. The company also noted that major manufacturers are exhibiting tendencies to limit the supply of traditional petrol and diesel vehicles, as they shift focus toward bolstering EV sales.
In the recent six-month period ending August, Vertu reported a 10% increase in EV sales, contrasting with an overall industry downturn in private EV sales, which saw a 7% decline according to the Society of Motor Manufacturers and Traders.
Despite their efforts, Vertu also disclosed that overall revenues increased from £2.3 billion to £2.5 billion; however, profits took a hit, plunging from £37.8 million to £23.5 million. This news underscores the evolving landscape of the automotive industry, where financial dynamics are shifting rapidly as electric vehicles become more prevalent.
As the market adapts, consumers, dealerships, and manufacturers will need to navigate these changes carefully, addressing both the challenges and opportunities presented by the ongoing transition to electric mobility. Whether you’re considering an electric vehicle or evaluating your existing lease, staying informed about market trends will be vital in making the best financial decisions in this evolving environment.